Allstate Insurance v. Campbell

MURPHY, Chief Judge. This case focuses upon an action brought by an insured against an insurer for a claimed bad faith failure to settle a third-party claim against the insured where the insurer ultimately settled the claim prior to trial and thus no excess judgment was rendered against the insured. I Robert Campbell was involved in an accident in which his automobile struck an automobile driven by Kimberly Baptiste on August 9, 1990, in Montgomery County, Maryland. Baptiste filed a negligence action against Campbell in the Circuit Court for Montgomery County for injuries she sustained as. a result of the collision.

Liability was not an issue in the case. At the time of the accident, Campbell was insured under an automobile liability insurance policy with Allstate Insurance Company, Inc. (Allstate). The policy had a liability limit of $20,000 and contained the following pertinent language: “Allstate will pay for all damages an insured person is legally obligated to pay because of: “1. bodily injury sustained by any person---- “We will defend an insured person sued as the result of an auto accident even if the suit is groundless or false. We will choose the counsel.

We may settle any claim or suit if we believe it is proper.... ” In accordance with its policy, Allstate retained counsel to defend Campbell in Baptiste’s suit. After analyzing the case, counsel, Rocco Nunzio, advised Allstate that a jury could return a verdict in excess of policy limits.- ³⁸⁵ Subsequently, Baptiste offered to settle the claim within the limits of Campbell’s policy. Allstate did not agree to settle the claim and Baptiste’s offer was withdrawn. In the meantime, Nunzio wrote to Campbell, recommending that Campbell obtain independent counsel with respect to any excess liability.

Campbell thereafter retained Gerald Solomon, Esq. as independent counsel. Solomon wrote to Allstate, advising the company that failure to settle Baptiste’s claim within policy limits was a failure to act in good faith, and urging that Allstate settle the claim immediately. Allstate again declined to settle the claim. It also declined to direct Nunzio to pursue discovery on behalf of Campbell or to seek an independent medical examination of Baptiste.

In addition, it refused to pay Solomon’s fees for representing Campbell. On February 25, 1992, Campbell filed a Complaint for Declaratory Relief in the Circuit Court for Montgomery County, claiming that Allstate failed to act in good faith and thus breached its contract to defend Campbell. Campbell asked that the court order Allstate to pay his legal fees and costs arising out of Solomon’s representation of him in the Baptiste suit and in his action against Allstate. Allstate moved to dismiss the complaint, maintaining that the issue of bad faith was raised prematurely.

Shortly thereafter, before a ruling was issued in the declaratory judgment action and prior to trial in the Baptiste suit, Allstate settled Baptiste’s claims for the policy limits of $20,-000 and obtained a full release on behalf of Campbell. Campbell then filed an Amended Complaint for Breach of Contract asking for attorney fees and expenses totalling $4,218.85, incurred in obtaining excess counsel. In his complaint, Campbell averred that Allstate breached its contract to defend Campbell when it failed initially to settle the Baptiste case within policy limits and failed to represent adequately the interests of Campbell, thus forcing Campbell to retain independent counsel. 1 Allstate filed a motion to dismiss the ³⁸⁶ complaint, arguing that no controversy existed because Allstate had fulfilled all of its duties under its contract with Campbell. Allstate contended that Campbell did not have a cause of action against it for bad faith failure to settle the claim because such an action may not be brought against an insurer until after a judgment exceeding policy limits has been entered against an insured.

The court (Ferretti, J.) granted Allstate’s Motion to Dismiss, based upon a finding that Campbell was not entitled to the relief requested based upon a contract cause of action. Campbell appealed to the Court of Special Appeals. That court noted that the trial court’s only ruling was that Maryland does not recognize a cause of action for breach of contract in a suit against an insurer for wrongful refusal to settle. The intermediate appellate court then reformulated Campbell’s complaint as a tort claim rather than a contract claim.

It then concluded that the complaint sufficiently pleaded a claim for breach of the insurer’s tort duty to make a good faith attempt to settle within policy limits. The court held that Campbell’s amended complaint set forth the requisite elements of a tort claim in the allegations numbered 6, 19, 20, ³⁸⁷ and 22. See supra n. 1. The court noted that “the mere ‘inartful’ titling of appellant’s pleading in terms of breach of contract [did] not render invalid the substance of the pleading itself.” Campbell v. Allstate Ins., 96 Md.App. 277, 286 , 624 A.2d 1310 (1993).

The court also concluded that Campbell’s claim for a bad faith failure to settle was not premature, as was contended by Allstate, because Campbell became exposed to an excess judgment at the moment Allstate “arbitrarily declined” Baptiste’s offer of the policy limits. 96 Md.App. at 286-87 , 624 A.2d 1310 . The court observed that while Campbell suffered no damages related to an excess judgment, he did suffer damages, in the form of fees for counsel retained in order to minimize excess exposure, which he was entitled to recover. Id. at 287 , 624 A.2d 1310 . The court recognized that an insurer is not obligated to accept an offer simply because it is within policy limits, but noted that an insurer is obligated to negotiate and settle a claim with “proper regard” for the insured’s interests and is liable for damages for a bad faith refusal to settle within policy limits.

It further noted that an insurer must use “reasonable care” in defending the insured and that a refusal to settle must be based upon “an informed judgment based on honesty and diligence.” Id. at 291-92 , 624 A.2d 1310 . The intermediate appellate court concluded that there was a “legitimate question of fact” as to whether Allstate breached its good faith obligation to settle for policy limits where: “(1) an insurer has rejected the advice of appointed counsel to settle the case; (2) for an offer at or near the policy limits; (3) prior to the jury verdict; and (4) when the insured’s liability [is] clear.” Id. at 294-95 , 624 A.2d 1310 . Accordingly, it reversed the trial court’s dismissal of the action and remanded the case to the circuit court for further proceedings. We granted Allstate’s petition for certiorari.

II Allstate argues that the trial court did not err in dismissing Campbell’s contract claim against it because it did not breach ³⁸⁸ its duty to defend or settle the claim within policy limits. The insurer asserts that there is no contractual obligation to settle a claim at a time chosen by the insured or the insured’s independent counsel. Allstate avers that the Court of Special Appeals erred in reforming, on its own initiative, Campbell’s complaint from a contract to a tort action. It contends that the court thereby denied Allstate the right of notice and the opportunity to respond to allegations of negligence. 2 Allstate recognizes that an insurer who breaches its contractual duty to defend may be liable for the insured’s attorney fees incurred in defending a suit; it urges, however, that the law does not authorize awarding an insured attorney fees in a tort action against the insurer.

Rather, it maintains that the insured’s damages for a bad faith failure to settle a tort action consist of the amount of any judgment against the insured in excess of the policy limits. It argues further that under its policy Allstate retains the sole right to select defense counsel and there is no contractual obligation to reimburse Campbell for obtaining independent counsel to monitor the litigation or evaluate the appointed counsel. Allstate further suggests that while an insurer may be held liable to the insured for an excess judgment if the insurer, in bad faith, fails to settle a claim, there is no authority for holding an insurer liable for not settling a claim when it ultimately settles within policy limits and no excess judgment is entered. It avers that the Court of Special Appeals improperly expanded the law of Maryland in so holding.

Allstate also argues, contrary to the insured’s position, that there was no conflict of interest between Allstate and Campbell with regard to the Baptiste- claim that would require Allstate to allow Campbell to retain independent counsel at Allstate’s expense.. ³⁸⁹ Campbell contends that he sufficiently alleged the elements of a tort claim for bad faith, and that the facts alleged in the complaint afforded Allstate sufficient notice to defend against the tort action. He argues that this case is a mixed action of tort and contract because the issues are here interrelated. He claims that the insurer’s contractual duty to defend is breached when the insurer, in bad faith, breaches its tort duty in refusing to settle within policy limits. Thus, he says, it is consistent with Maryland law to award attorney fees to the insured.

Campbell contends that an insurer need not altogether refuse to defend a suit to breach its duty to defend. Instead, he asserts that a breach exists if the insurer assumes a position that leaves the insured with no alternative but to retain independent counsel to assume the defense. He observes that the contractual duty to defend is not limited to the duty to indemnify for the policy amount. Moreover, he says that Allstate breached its duty to defend when it “arbitrarily” refused to settle the claim at the time that Baptiste agreed to accept the policy amount.

In this regard, he suggests that it breached its duty to defend when it refused to authorize the taking of depositions and to authorize an independent medical examination. The insured, to further support his claims, points out that Nunzio recommended that Campbell retain independent counsel with respect to excess liability; that Allstate declined to follow independent counsel’s advice; that Allstate refused to pay fees of independent counsel; and that Allstate “attempted to direct” Campbell’s defense even though there was a conflict of interest. According to Campbell, the conflict of interest arose when Allstate declined to settle within policy limits or to authorize discovery. He maintains that Allstate’s appointed counsel, Nunzio, was thereby rendered unable to adequately represent Campbell because he was torn between his duty to represent Campbell and his duty to Allstate, who paid his fees.

Campbell also contends that because Nunzio sent a letter to Campbell recommending excess counsel, rather than a letter to ³⁹⁰ Allstate informing it that it was acting in bad faith, Nunzio aligned himself with Allstate, leaving Campbell no choice but to seek independent counsel to handle the defense of the Baptiste suit. And finally, Campbell argues that the Court of Special Appeals did not improperly expand the law in Maryland imposing liability upon an insurer for a bad faith refusal to settle; rather, he says, the court did no more than permit the aggrieved insured to sue for attorney fees prior to the rendering of an excess verdict. Campbell urges that because all elements of the cause of action for bad faith failure to settle are satisfied prior to trial and a breach may therefore occur even absent an excess verdict, it is inequitable to make an excess verdict a prerequisite to an action for bad faith failure to settle. III In reviewing the propriety of a trial court’s grant of a motion to dismiss for failure to state a cause of action in contract, we assume the truth of all well-pleaded material facts and all inferences which reasonably can be drawn therefrom.

Decoster v. Westinghouse, 333 Md. 245, 249 , 634 A.2d 1330 (1994), and cases cited therein. Only if the facts alleged in the complaint fail to state a cause of action is dismissal proper. Id. In reversing the trial court’s dismissal of Campbell’s complaint, the Court of Special Appeals held, as we earlier observed, that although the complaint did not state a cause of action under a contract theory, it set forth the essential elements of a cause of action in tort, sounding in negligence, for bad faith refusal to settle the claim.

We recognized a cause of action brought in tort for bad faith refusal to settle a claim within policy limits in State Farm v. White, 248 Md. 324 , 236 A.2d 269 (1967). We there considered the duty owed to an insured by an insurer when there was an opportunity to settle a claim within the limits of the insured’s liability policy. After an extensive review of authority, we adopted a “good faith” theory based upon the recognition that ³⁹¹ because the insurer had exclusive control over the defense of a claim, the insurer had a tort duty to exercise good faith in making a decision not to settle a claim within policy limits. Id. at 329 , 236 A.2d 269 .

We observed that this good faith standard requires that an insurer’s refusal to settle a claim within policy limits be an informed judgment based upon honesty and diligence. Id. at 333 , 236 A.2d 269 . We noted that the insurer’s negligence, if any, was one of several factors relevant to a determination of whether the insurer acted in good faith. Id.

We identified the factors which courts used in applying the good faith test: “[T]he courts have found that the presence of one or more of the following acts or circumstances may affect the ‘good faith’ posture of the insurer: the severity of the plaintiffs injuries giving rise to the likelihood of a verdict greatly in excess of the policy limits; lack of proper and adequate investigation of the circumstances surrounding the accident; lack of skillful evaluation of plaintiffs disability; failure of the insurer to inform the insured of a compromise offer within or near the policy limits; pressure by the insurer on the insured to make a contribution towards a compromise settlement within the policy limits, as an inducement to settlement by the insurer; and actions which demonstrate a greater concern for the insurer’s monetary interests than the financial risk attendant to the insured’s predicament.” Id. at 332 , 236 A.2d 269 . In White , the insurer had refused several offers to settle a claim against the insured within policy limits, and trial before a jury resulted in a judgment against the insured for